Thursday, 10 November 2016

Profit, Rent, Interest and Asset Prices - Part 17 of 19

We therefore, have a means of determining what the upper bound for the level of rent would be. It is the profit that capital could obtain by being advanced on a particular piece of land. Indeed, on this basis the distinction between absolute and differential rent disappears, because the basis of differential rent is that the particular fertility of the given piece of land, enables an additional surplus profit to be obtained over and above that obtained on the land which determines the market value. In other words, the total rent on any piece of land is equal to the difference between the market value, and the individual price of production, per unit of output. What the capitalist farmer buys is the use value of the land, and on more fertile land that use value is greater than on less fertile land. Consequently, they pay a higher price/rent for it. In reality, this upper bound will be set not by the whole amount of profit that can be produced, but only that which still enables the capital to produce the average rate of profit. Any rent above that level would cause the capital to be invested in some other sphere of production.

Marx effectively came to a similar conclusion, in Theories of Surplus Value, where he recognised that what is actually levied is not two separate rents, an Absolute Rent and a Differential Rent, but a Total Rent. Where the least fertile land, which only pays Absolute Rent, determines the market value, this separation into Absolute Rent and Differential Rent, is relatively unproblematic, but where market conditions are such that the market value is determined by a more fertile type of land, this separation of Absolute and Differential Rent, as component parts of the Total Rent, can lead to a situation where some land is unable to cover all of the Absolute Rent, but also also some land is left in a position where it would be producing a negative Differential Rent. Marx resolved this by introducing the concept of Differential Value.

It might be thought that the lower bound is set by zero, but as with the rate of interest, this is only a theoretical lower bound. In reality, the owners of these assets are concerned to obtain a revenue from them, and rates of return of near zero, do not produce the required levels of revenue. Where the owners of these assets do continue to hold them, and indeed demand more of them, despite near zero, or even sub-zero rates of interest, it is because they have become fixated, as over the last thirty years, with a search for speculative capital gain, as an alternative to revenue from these assets. Such periods of speculative frenzy, historically, have been short-lived, ending in the bursting of bubbles. It has only been the unprecedented level of state intervention, particularly by global central banks, that has enabled this period of speculative frenzy to continue for so long, via the blowing up of ever larger speculative bubbles in an increasing range of financial and other assets.  That is a direct result of the fact that the majority of private wealth is now held in the form of this fictitious capital, rather than in the form of real productive capital.  It reflects the continuing political power of that landed and financial oligarchy, whose immediate interests - to keep the nominal value of their fictitious wealth inflated - is placed above the interests of the real economy, and of their own longer-term interests.

But, the task of a theory of interest rates, or rent and of asset prices, should attempt to uncover the underlying laws, and ultimately that is determined by the revenues produced by these assets, and not the periodic distortions that arise from speculative activity. In the end, the speculative activity is self-correcting, and self-defeating, because every speculative bubble ends in a bursting of that bubble, and the more that is prevented from happening, the greater the size of the financial bust when it occurs. The fundamental laws can only be avoided for so long. By contrast, as Marx says, the revenues – rent and interest – produced by these assets – land and capital – can be renewed year after year, without any deterioration of the asset itself.

“Whatever may be the disparity of these relations in other respects, they all have this in common: Capital yields a profit year after year to the capitalist, land a ground-rent to the landlord, and labour-power, under normal conditions and so long as it remains useful labour-power, a wage to the labourer. These three portions of total value annually produced, and the corresponding portions of the annually created total product (leaving aside for the present any consideration of accumulation), may be annually consumed by their respective owners, without exhausting the source of their reproduction. They are like the annually consumable fruits of a perennial tree, or rather three trees; they form the annual incomes of three classes, capitalist, landowner and labourer, revenues distributed by the functioning capitalist in his capacity as direct extorter of surplus-labour and employer of labour in general.”

(Capital III, Chapter 48) 

The underlying law, therefore, that determines the rates of interest and levels of rent is determined by the requirement to produce these revenues, because it is these revenues that are the sustainable bases upon which these two classes – money-capitalists and landlords – rely for their existence.

If we ignore the potential for the owners of these assets to finance their consumption out of capital gains, for limited periods, the determining factor then becomes the search for yield. This is seen every day in financial markets, as money moves, literally, one minute into bonds, and out of stocks, and the next in the other direction.

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